In the News
Selling Gift Cards in Cyberspace
Networks, banks and more talk about the advantages and challenges of the online sales channel
November 2007 - By Prepaid Media Staff
Sales of both closed- and open-loop gift cards have ballooned over the last 10 years, reaching nearly $61 billion in 2006, according to Mercator Advisory Group estimates. Retailers, issuers and program managers are nevertheless continuing to look for ways to increase sales and attract new customers. For some, the online channel is a way to do that. In fact, by 2011, 30 percent of all gift card sales are expected to be online, according to a report released last fall by Forrester Research. While the research, culled from a consumer survey, did not differentiate between network branded and retail gift cards, it suggests a growing interest in buying online.
What is the attraction? Industry leaders say buying online is convenient — consumers don't have to leave the house — and in many cases they can give cards a personal touch by uploading a photo or adding special messages right onto the plastic.
"What we found in our research is that the most desirable location to buy cards traditionally has been where the card is going to be redeemed, but that's shifting to online or third-party channels like a drugstore or grocery store," says Andrew Buss, vice president of The Hazelton Group, a subsidiary of Archstone Consulting that released its "2007 Holiday Gift Card Survey" in September 2007.
Of the survey's 1,000 respondents, 45 percent said they prefer to buy gift cards at the retailer where the card will be redeemed, 24.9 percent said they preferred purchasing online and 19.8 percent of respondents preferred third-party retailers. Although other surveys put third-party retailers above online as a distribution channel for gift cards, research consistently rates both channels in the 20 percent range.
Convenience and the opportunity to personalize are key drivers for online sales. "The number one reason consumers give for purchasing online is convenience," says, Jeff Keller, chief customer officer for Arroweye Solutions Inc., a Chicago-based marketing-services company that offers such customers as Dunkin' Donuts and Toys "R" Us customizable gift cards and greeting cards for their Websites. Arroweye also operates Cardways.com, a Website that sells customizable greeting cards and closed-loop gift cards for many retailers. "Consumers want to get it and get it quickly. When you add to the experience, which is what we've done, now you've got a wow factor."
The Power of Personalization
The growth in online gift card sales has been significant for Arroweye's 50 retail clients and Cardways.com. "We're still going through the exponential phase," Keller notes. He credits the popularity with consumers to the selection of 2,000 to 3,000 greeting cards, the ability to add personal messages, including a personal photo, to the gift card itself and the presentation. Cards are mailed in a white, woven envelope with a First Class stamp.
American Express Co. also offers personalized and themed gift cards to online shoppers. "Given that you're not in a storefront, you can offer slightly more personalization and a more tailored offering to the customer," says Stefan Happ, general manager of American Express gift cards. American Express has developed seven gift card themes, including wedding, movie, dining, teens, kids, birthday and thank you, in addition to its classic gift card design. Customers may not find all of these choices in retail and banking locations where American Express gift cards are sold, but they are all available through its Website. Online purchasers also can have a recipient's name or a customized message embossed on gift cards.
"The online channel is a pretty important part of our overall strategy right now," Happ says. "You cannot be without an online channel. Customers expect to buy online and we provide that." Still, Happ says he is doubtful that online will become American Express's primary sales channel. Instead the approach has been to get cards into a variety of channels, including retail, banks and online.
So far it is paying off. In 2006, AmEx gift card sales exceeded all previous years combined since the program's inception in 2002, and American Express is the largest issuer of open-loop gift cards. Cards first became available online in 2003, and although online sales make up a smaller percentage of overall sales than that of retail and bank channels, online sales in 2006 also were greater than all previous years combined.
Since Discover Financial Services began selling its gift cards online in 2003, it has experienced "healthy" growth as e-commerce has become more and more mainstream, says Julian Chu, director for prepaid products at Discover. Chu admits, however, that there has been tremendous seasonality to overcome with the online gift card program. To address the issue, Discover has created a line of gift cards with matching greeting cards for everything from weddings and new babies to birthdays and bar mitzvah's.
Chu also notes that selling gift cards online offers a superior touch point to retail distribution because it is a direct relationship between the consumer and Discover. "There's no intermediary between us and the customer," Chu says. "We can see where they come from online, which gives us a lot of data points that are very valuable when we want to market to these customers and draw additional customers to our site." And having no intermediary also means Discover and its bank do not have to share the revenue on the sale.
A Banker's Perspective
Neither MasterCard Worldwide nor Visa Inc. sell gift cards directly to consumers. Instead, some of their financial institution members offer network branded cards on their sites. For example, Cleveland, Ohio-based National City Corp. has been issuing and selling its own Visa-branded gift card for the past five years. Although overall sales have been growing steadily for the bank, online sales have been relatively flat, according to Becky Wiessner, vice president and prepaid product manager.
Last year, National City reached 1 million cards sold through its branches, bulk corporate orders and Website, but online sales only account for about 3 percent of total sales. In-branch distribution and corporate orders make up the majority of the bank's gift card business.
"Overall I think the channel has been an effective one for U.S. Bank," says Ralph Bianco, senior vice president of retail payment solutions for the Minneapolis-based bank. Although Bianco did not provide sales numbers, he said, "We do believe there is more opportunity for the online channel even though we still sell the overwhelming majority of our cards in the branch."
Bianco notes that U.S. Bank, which has more than 2,500 branches, recently hired a new channel manager whose responsibility it will be to grow both the online and branch gift card sales. "We know that online sales tend to be more to U.S. Bank customers, so we're going to do more cross-promotions through our debit or credit cards to let customers know they can go online and buy a gift card," he says.
Costs of Doing Business Online
National City's Wiessner says the bank is committed to offering gift cards online for customers and non-customers even though merchant-processing fees mean it costs more for the bank than selling the card in its more than 1,400 branches. "Buying gift cards online is just a natural fit for people who are already online and making purchases. There are people who want to avoid the hustle and bustle of the mall, and if we don't offer it, they are just going to go somewhere else," she says.
Bianco says that costs are different between branch and online sales, but estimates that, depending on your point of view, the total costs roughly match. While you may pay more for fraud monitoring and card fulfillment online (because of postage and personalization), he notes, you have to provide incentives to branch staff to drive sales. "I think you have to look at online holistically. It's part of your overall online banking strategy in which you offer all your bank products to customers online. Why would we not put prepaid cards on there? They would be conspicuous in their absence." Bianco says.
Offering gift cards through online banking sites is something in which Online Resources Corp. sees great potential. The Chantilly, Va.-based company provides Web-based financial services for more than 2,700 financial institutions, billers and credit service providers, including First Command Bank and Pinnacle Federal Credit Union.
Last November Online Resources began offering its clients the option of Card HQ, an online gift card store add-on to their online banking portal that allows account holders to purchase a variety of closed-loop gift cards using their online banking credentials. Since the program launched, 150 financial institutions have added Card HQ and its 10 merchant-specific cards to their sites. The customer response has been positive, says Bill Kinnelly, senior vice president of eCommerce Services for Online Resources.
"There are two elements of trust in this concept," Kinnelly explains. "The bank is saying to the merchants, 'I know who these people are. The money is good.' The other factor is on the consumer side. Consumers trust their banks and feel more secure buying a gift card on their bank's site than on a random Website."
Online Resources customers pay a nominal fee to set up Card HQ and pay no fees after that. They earn a 3 to 4 percent commission on the value of cards sold. Some of the financial institutions the company serves issue their own gift cards, but thus far, open-loop cards have not been added to the Card HQ online gift card store. Kinnelly says open-loop cards, the ability to reload cards and corporate bulk orders are enhancements Online Resources is exploring. The company will also be adding new national retailers for holiday 2007.
Avoiding Fraud
As with any payment vehicle, security is an issue. And when selling gift cards online, most companies look to the payment method, usually credit or debit cards, as well as address verification to ensure they know who is buying their cards. "We're doing address verification system checks and some other fraud checks," says National City's Wiessner. "Certainly the risk is much higher for the online channel than in the face-to-face environment, but we're doing due diligence, even on bulk orders," she says.
"There are a number of layers imbedded in the transaction process," says Discover's Chu. "We use the credit card processing information for verification. One of the main fraud issues is consumers using stolen credit card information to make purchases online."
Corporate Connection
Most companies who sell gift cards online cater to corporations as well as consumers. In fact, American Express's Happ says corporate sales have doubled in the last year. And most of those orders come through the Website. The company recently raised the limit on the size of bulk orders that can be purchased online from $14,000 on 600 cards to $35,000 on 1,400 cards to meet the demand of large corporations.
For GiftCards.com, switching from closed-loop gift cards to Visa-branded cards in 2004 has increased its corporate sales dramatically. The company now provides between 6,000 and 7,000 corporate clients with co-branded Visa gift cards for employee incentives, rewards and consumer promotions.
But GiftCards.com has not abandoned the consumer side. "During the Christmas holidays we have more consumer clients," says co-founder and CEO Jason Wolfe. "During the other 10 months of the year, we have more corporate clients buying cards for their employees. It flops between 65 percent consumer and 35 percent corporate and vice versa depending on the time of year."
The acquisition of its own fulfillment center, which Wolfe expects to open in February, will make GiftCards.com even more attractive to corporate customers and consumers because the company will be using print-on-demand technology. "We're going to enable you to create your own card," Wolfe says. "There will be no limit to the possible designs or styles. Customers could upload their own images." And for the corporate clients, turnaround will be much quicker on cards, even if every single card is different, Wolfe notes. The company has purchased Datacard's MX6000 to thermal print blank white plastic cards.
The Next Generation
The online channel is growing steadily for the likes of American Express and Discover, as well as those businesses that rely solely on the online distribution channel. It has not been as lucrative for banks, but it is still part of the bank's overall sales strategy because it reaches customers who are not going into the branches.
With Forrester Research projecting that e-commerce, excluding travel, will reach $270 billion in revenues by 2011, and online gift cards sales accounting for $12.7 billion of that, industry insiders say offering gift cards online is a viable option.
"The key to our success is that we are the leading player in each channel," says AmEx's Happ. "You really have to understand how to present it, how to manage risk and how to manage compliance. In order to make it work economically, you have to be an expert in all of these areas."
Blackhawk Network, one of the leading third-party distributors of gift cards, is banking on its own knowledge of these issues along with the expertise of its partner Arroweye Solutions. The two launched a new site in November that offers a selection of third-party gift cards online called GiftCardMall.com.
"What we wanted to do is create an online experience that took not only the best of what we do in brick and mortar, which is offer the best brands and the best variety, and put it online but also add the ability to personalize," says Teri Llach, group vice president for Blackhawk.
Safeway, Blackhawk's parent company, has been selling about 20 third-party gift cards on its Website since 2004, but the new site is a much bigger initiative, Llach says. Through a partnership with Arroweye, GiftCardMall.com (GiftCardStore.com internationally) offers gift card and greeting card personalization.
Llach says this year about 30 of Blackhawk's gift card partners will have their cards on the site, but by next year she expects to see the full 400 cards offered online. Blackhawk also will be working with its partners to link to GiftCardMall.com or offer a similar gift card mall on the retailer's Website.
"Gift cards 10 years ago were not seen as personal," Llach says. "Gift card malls have helped make them personal by offering cards that fit the recipient's personality — a Nordstrom card for Mom, an electronics card for a brother. We've married the convenience of the gift card mall and the great brands we offer and taken it to the next level. With the Website, consumers and corporations alike have even more capability, not only to pick the best brands but to add that message, a logo or a personal photo."
Convenience and personalization are the rallying cries for those selling gift cards online, and companies are working hard to get that message to consumers and corporations. Blackhawk will spend half a million dollars in marketing this year to promote the new site, but Llach says: "Next year we'll blow the roof off of it."
Sidebar
Buy Online, Shop Online
Convenience is king for online shoppers, and many online gift card providers also offer virtual gift accounts for customers who would rather email a gift "card" than wait for plastic to be sent through the mail. These accounts typically can be used only for online, telephone or mail-order purchases.
Last year, GiftCards.com and Simon Malls, which has the largest Visa gift card program in the country, each launched virtual Visa gift accounts for their online customers. Both companies are focusing more on the consumer side for the virtual accounts, but the option is open to corporations.
"For that population that just wants to email a gift account to a third party, the Simon Giftaccount has become very popular," says Stewart A. Stockdale, chief marketing officer for Simon Property Group. "I don't think it will be as big as our gift card, but it's just another option to offer a virtual open-loop product that has all the acceptance of Visa," says Stockdale. Simon Property Group partnered with Coca-Cola to include the gift account as one of "My Coke Rewards."
GiftCards.com VirtualGift Accounts cost $4 plus the value on the card, compared to the $5.95 fee for the gift cards. Recipients must create an account on GiftCards.com to access their VirtualGift through the gift manager. Account holders are charged 35-cent fee for each transaction, and a monthly maintenance fee of $2.50 goes into effect beginning on the seventh month after purchase. Simon Giftaccounts are $2 in addition to the card value, and a $2.50 monthly fee is charged after the first 12 months following the opening of the Giftaccount.
